Cryptocurrency Day Trading VS Long Term Holding

Everywhere you look in cryptocurrency there’s somebody selling you some technical analysis report that they claim will make you a fortune. As a new investor it can be tempting to follow this advice, but unfortunately, that can lead to some pretty poor decisions. That’s not to say that technical analysis does not have its merits, and there is certainly money to be made on short-term trades.

However, this style of investing requires you to be much more involved, and if you don’t know your stuff then you could quickly lose your shirt. In this article, we’re going to go over the basics of both crypto investing styles, and hopefully, once we get to the end you’ll be able to decide for yourself which is the best choice for you.

There’s nothing wrong with either of these trading styles and as long as you’re careful there’s nothing wrong with experimenting with either or both of them. Just make sure not to invest more money than you can afford to lose, and stay away from investing on borrowed money. Alright, let’s define these trading strategies.

What is cryptocurrency long-term hold investing?

When an investor decides to hold a coin or token in the long-term they believe in the project, and they think that in the future it could be quite valuable. This generally means that you are looking to hold on to this particular asset for at least a year. If you’re too busy to keep up with the market hype or if watching the market bounce up and down makes you sick then this could be the approach for you.

While going for the long hold is not quite as exciting as performing short-term trades, it can be better in some cases. For starters, it forces you to evaluate your investments with a more clear thought process. Does this project really have a future? Chasing short-term profits can be detrimental to a lot of portfolios, and this strategy can keep you grounded. Before choosing any long-term holds make sure to completely evaluate the project, the team, and future use cases. While this part is a lot of work after you’ve found a good project your work is done.

Arguably the best benefit of this strategy though is the fact that you’ll pay a reduced tax rate. Every time you exchange one cryptocurrency for another it is a taxable event. Any gain that you have made must be reported, and the government will expect you to pay taxes on it. However, there is special treatment for long-term capital gains, and as a long-term holder, you can take advantage of this.

You must hold your coins or tokens for at least one year for this to go into effect, but if you do the tax rate will be much more favorable. Short-term gains are generally taxed at regular income tax rates. Small amounts of capital gains may even be tax-free depending on your regular income.

Pros
  • Reduced tax rate thanks to long-term capital gains.
  • More hands-off than short-term trading.
  • Allows for cost averaging.
  • Forces you to research projects thoroughly.
  • Less paperwork involved for income reporting.
Cons
  • You may miss out on large gains.
  • Not as exciting as day crypto trading.
  • Harder to make daily gains or income.

What is day trading?

When you day trade you’re trying to take advantage of cryptocurrency price fluctuations that typically happen within a day. Though, you can also do swing trades which will happen over a series of a few days or even a couple of weeks. Often times these are smaller gains, but they can quickly add up if you have a lot of coins.

Many investors get caught up in the hype of this trading strategy when they see others making hefty gains. That’s because it’s exciting, and the allure of fast money is intoxicating. Unfortunately, this strategy is not as easy as it looks, and if you’re new to investing it would behoove you to be cautious here.

This strategy is not for everybody, and you’ll need to evaluate whether you’re prepared to keep up with it. Many traders watch the markets constantly, and if that doesn’t sound like fun to you then day trading might not be the way to go.

If you’re not afraid of putting in the work, and the market’s ups and downs don’t give you anxiety, then there’s plenty of money to be made in these short-term trades. You should, however, take some steps to protect yourself. There’s a lot of sharks out there waiting for fresh blood.

First and foremost, don’t buy into pump and dump groups. In almost every case you will be taken advantage of. These people want to use you to make money, and you shouldn’t let them. Many times these are performed on near dead assets that have a market cap that is easier to manipulate, and once the dump happens you’ll be stuck with a worthless coin.

Similarly, it can be dangerous to buy into a pump, because you could end up catching the downtrend and losing a lot of money. If you plan to day trade it would be in your best interest to review charts carefully and to make sure you have the whole story before investing. Don’t look at just the day’s chart. Zoom out and get the big picture version to be sure.

It’s also a good idea to never invest your entire bankroll in one trade. Spreading your risk around lowers your profit per trade, but it can significantly raise your chances of success. Keep in mind that not every trade will pay off, and you’ll likely need to average your wins against your losses.

Pros
  • Potential for big gains.
  • Can potentially provide you a new income stream.
  • More exciting than a long-term holding.
Cons
  • Carries higher risk than a long-term holding.
  • Higher tax rates.
  • More paperwork is involved.
  • You could end up holding a useless coin when it dumps.

Which cryptocurrency trading strategy is the best?

There’s really no right answer here, and it might even be a good idea to utilize both strategies. If you’re interested in learning how to day trade or swing trade then you could dedicate a small portion of your capital to it. There’s nothing wrong with this as long as you don’t overexpose yourself.

In fact, if you have a decent amount of coins of a particular type in your long-term holdings, then flipping them may help increase your portfolio. Many investors will actually trade a portion of their long holds on price swings to up the size of their bags.

Keep in mind however that it may not be wise to do this with the entire pot. Instead, commit to swing trade 25-50% of your holdings in a particular coin. That way, you can leave the rest untouched so you don’t miss out on a run, but you still have the ability to use small price swings to your advantage.

This can be particularly useful for assets that are trading in the 1-5 cent range. It’s routine for these coins to go up and down by a penny within the course of a day, and that means you could easily build up your holdings by trading the dips.

In closing, the best crypto trading strategy is diversifying yourself in order to mitigate your risk. If you do this properly then both long-term and short-term investments can be good calls, and it’s easy to mix and match them to fit your risk profile.

No matter what strategy you choose it’s important to do your own research. Take all investment advice with a grain of salt, and make sure to verify any information for yourself before proceeding with any trades.